Recession. The market is concluding that
search won't be "immune" from economic weakness.

Wireless. Will Google dump $5 billion into
spectrum and another $5 billion into infrastructure? No one
knows--and the uncertainty is freaking people out.

Even a deep recession would only likely have a temporary impact
on the stock: At some point, advertising would recover, and the
stock would, too. Revenue deceleration and/or a radical change in
the company's business model, meanwhile, would likely lead to
permanent multiple compression.

We think it is unlikely that Google will decide to become a phone
company, but it might blow a year's worth of cash flow on
spectrum licenses. Revenue unit deceleration, meanwhile, almost
always leads to multiple compression--as the momentum investors
who have happily tagged along for Google's rocket ride bail
out.

How low could the stock go? At a peak of around $750, Google was
trading at about 50X 2008 estimated free cash flow of $5 billion.
This wasn't crazy, but for a company this large, it was also a
momentum multiple. Now that revenue is decelerating sharply, we
think Google's cash flow multiple will gradually compress to a
more typical 20X-30X. (eBay, another stock that used to trade at
40X-50X, is now down at 15X, so don't fool yourself into thinking
that 20X-30X is an absurd fire-sale price).

Where would that leave the stock? 20X-25X $5 billion of
cash flow puts you at a market cap of $100-$125 billion, or about
$300-$450 a share. Right now, with the stock at $495,
the free cash flow multiple is about 30X-35X. This is far from
outrageous and might be sustainable, but it also assumes that
Google's revenue growth will soon stabilize in the 20%-30% range
and that free cash flow will continue to grow rapidly.

PS:
TechCrunch asked how we feel about our 10-15
year Google $2000 scenario. Very good, actually. In the
months since we published that post, Google's run-rate free cash
flow has jumped to $5 billion. Perhaps if the stock gets truly
smashed, we'll get a chance to put our money where our mouth
is.

Recommended For You
Powered by Sailthru

Google Collapse: How Low Can It Go?

How low can Google's stock go? Barring a cash flow collapse, the floor should be around 20X-30X FCF, or $300-$450. Stable revenue growth would likely keep the multiple in the current 30X-35X range, but the days of 50X are history.